Mark Hulbert: Gloomy ISM readings are a good predictor of company earnings — but not of what the stock market will do

by | Aug 5, 2022 | Stock Market

I’m not saying the bear market is over. But if U.S. stocks continue to slide, don’t blame the ISM’s recent decline. The Institute for Supply Management’s manufacturing index — the ISM Index — is otherwise known as the manufacturing purchasing managers index, or PMI. The ISM reflects the results of a monthly survey of purchasing managers at hundreds of U.S. manufacturing firms.

Economic calendar: Nonfarm payrolls and unemployment data due Friday, along with a consumer-credit update and more This key indicator of economic health is currently at 52.8 — down from as high as 63.7 in early 2021, and at its lowest level since the early days of the COVID-19 pandemic lockdown. As my MarketWatch colleague Jeffry Bartash reported, this latest reading is “a sign of creeping weakness in the U.S. economy.” Many bears have pounced on this latest reading as a reason to expect further weakness in coming months. They point out, with substantial historical supporting evidence, that corporate earnings tend to follow the lead of the ISM index with a several month time lag. But that most definitely does not mean equities will follow. The stock market’s current level already incorporates the bad earnings significance of the ISM’s latest report. The bears’ argument would be justified only if they could show that the market systematically ignores or misinterprets that significance. Yet there is no such evidence. Consider what I found upon measuring the correlation between the ISM index and the S&P 500 Index
When focusing on contemporaneous changes in these two indices, I found a significant positive correlation coefficient …

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